CPI target well within reach, say economists

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Though China's consumer inflation is likely to peak in the third quarter of this year, the effective administrative price-control measures and a more flexible yuan will help ease inflation pressures, economists said on Monday.

At the same time, economists were not too sure on whether the Consumer Price Index (CPI), a main gauge of inflation, would remain within the 3 percent target set for the full year and how high the peak would be.

The country's CPI is likely to peak in June or the third quarter, said Cao Yuanzheng, the chief economist of Bank of China International.

"The peak is also due to the low comparison basis over the same period of last year," Cao said. The CPI declined 1.7 percent in June 2009 and 1.8 percent in July 2009, compared with the same periods of 2008.

Rising meat prices may be another contributor to the possible CPI surge in the third quarter of this year. Meat prices are expected to reach the highest level in the third quarter and edge up the CPI by 1 to 1.5 percentage points. That in turn, will see the CPI go past the 4 percent mark in the third quarter, said Cao.

Food accounts for about a third of the weightage in the CPI. Prices of vegetables have become stable as the weather is getting warmer and the government's control of food prices is working.

The rising producer price index (PPI) is yet to make an impact on CPI due to overcapacity problems. But the influence will become distinct as utilization improves. PPI, a major measure of inflation at the wholesale level, rose 7.1 percent in May and 6.8 percent in April, compared with a year ago.

Cao said annual inflation is likely to be controlled within 4 percent, but it might cross 4 percent in the second half.

Dong Xian'an, chief economist at Industrial Securities, said the peak would be at around 3.5 percent before moving downhill. He expressed confidence that the annual CPI would be maintained at around 3 percent.

"It's challenging to keep the CPI within the target scale," said Zhuang Jian, a senior economist with the Asian Development Bank.

Costs of basic resources like water, electricity and natural gas are expected to rise in many regions during the second half.

Recently about 14 Chinese provinces and cities have raised workers' minimum wages and that will eventually increase the costs of consumer products, Zhuang said.

It is also quite possible that the ADB may revise the nation's annual CPI forecast of 3.6 percent as the 3-percent target looks possible, he said.

"The government's control of food prices by increasing supplies has been effective and it may adopt similar administrative measures (in the second half)," he said.

A more flexible yuan will also help alleviate "imported" inflation as imports would become cheaper, and thus help control inflation, the economists said.

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